There was a slight whiff of fear in the air over the major exchanges today as all three major indices closed on their lows with the Dow down 1.24%, the S&P500 down 1.54% and Nasdaq leading the way lower at 1.94%. Volatility has returned after a long absence.
I have already warned you about autos, retail and commercial real estate…key sectors of the economy that look very recessionary. Next up is restaurants; this sector hasn’t reported a month of positive growth since February, 2016. If you are a regular watcher of CNBC you probably don’t know this.
The major stock indices were decidedly weaker today and the usual attempts to “buy the dip” for once fell flat. About an hour into the day the S&P had lost about 0.75%, the Dow was down 0.5% while the Nasdaq led the charge lower with a loss of 1.25%. But unlike so many other days, the indices fell further and closed on their lows with the S&P losing 1.45%, Dow down 0.91% and the Nasdaq down 2.13%.
I tuned in to CNBC this morning (big mistake) and learned that the stock market is up because of strong earnings and it’s going higher because of even stronger earnings to come. I should not do this to myself at my age. The sheer audacity of this lie almost gave me a heart attack.
European Central Bank (ECB) President Mario Draghi told us last week that EU growth is picking up. Really? It’s not showing up in bank lending and bank assets as you would expect.
Who has been buying stock and driving equities higher? The answer may surprise you. According to Credit Suisse strategist Andrew Garthwaite “one of the major features of the US equity market since the low in 2009 is that the US corporate sector has bought 18% of total market cap, while institutions have sold 7% of market cap.”
In January, 2015 heavy snowfall and cold weather across the country had everyone expecting a disastrous estimate of Q1 GDP. I’m sure you remember the vicious “polar vortex” that was endlessly reported at the time. And as predicted, in its April 29, 2015 first estimate of Q1 GDP, the Bureau of Economic Analysis (BEA) said the US economy grew by only 0.2%. The number was so bad the BEA decided to increase its seasonal adjustment provisions because they were obviously not adequately reflecting the impact of winter weather during the winter season.
To answer the question you need to know what you are measuring it against. Cheap compared to what? Let’s compare it to the world’s current favourite asset…stocks.
The VIX, the yardstick for measuring volatility in US stocks, is once again trading below 10. Here are some statistics from Kyle Beard of Bloomsbury Advisory: “The VIX has only traded below 10 41 times since 1993 (intra-day). 21 of those occurrences have taken place since May 1, 2017. When you consider there have been 6,179 trading days since 1993, you realize how incredible this is.”
What brings an end to a bull market, I am often asked, since I am known to be bearish at this time. Usually, it’s just exhaustion. But money flows are always involved in one way or another. So here is a scenario almost no one is thinking about.